AT&T: The most hated company in iPhone land

NEW YORK (CNNMoney.com) -- Consumer outrage about AT&T's 3G service for iPhones is boiling over, but the dropped calls and spotty service reflect a greater lack of foresight in the wireless industry.

Analysts say AT&T's problems would have happened on any network that carried Apple's (AAPL, Fortune 500) iPhone because of the overwhelming amount of data downloaded by iPhone users. Over the past three years, AT&T's data traffic increased 5,000% because of the iPhone.

"The challenges that AT&T has are being faced by a lot of operators around the world: Very rapidly growing usage coupled with dense populations," said Daniel Hays, wireless expert and partner at consultancy PRTM. "Would it have been different on Verizon? Probably not."

AT&T accurately states that it has the nation's fastest 3G network but it "probably bit off more than it could chew," said Doug Helmreich, program director at consultancy CFI Group. "Now some of their customers are paying the price."

IPhone users in New York and San Francisco in particular have been up in arms about frequent service interruptions. Earlier this month, AT&T's head of mobility, Ralph de la Vega, admitted at an investors' conference that the company's service in those two cities was "below our standards."

It's not just New York and San Francisco iPhone users who are grumbling. An annual Consumer Reports study recently rated AT&T (T, Fortune 500) the worst in customer satisfaction in 19 cities across the country. (Rival Verizon Wireless rated No. 1 in the study.)

In nearly three-quarters of the surveyed areas, AT&T was rated lowest for availability of service, frequency of dropped calls and quality of voice service.

The map that Verizon shows in its ads is correct, but AT&T's 3G network still covers nearly 80% of the U.S. population, said Carter. And AT&T's non-3G coverage is also broader than its 3G network.

With that kind of pedigree, analysts say AT&T was likely the best-equipped network to handle the iPhone.

"For Verizon ... we still wonder if the network has the capacity and backhaul to support a device with an adoption curve of the iPhone," said Piper Jaffray analyst Chris Larsen in a client note.

Perception vs. reality

AT&T admits that it has had problems keeping up with the data demands of iPhone users, which has prompted the company to accelerate scheduled improvements in its network.

"There's more work to be done and a sense of urgency to do it, but we feel like we're on the right track with our investments," said Fletcher Cook, spokesman for AT&T.

In the next few years, AT&T said it would double its network speed, and Cook said AT&T has already improved overall network quality by 25%. The company has also deployed more than 20,000 Wi-Fi hotspots across the country, which it says may help alleviate stress on its 3G network.

PRTM's Hays applauded the Wi-Fi solution and AT&T's dedication to improving its network, calling them "critical levers in addressing AT&T's network performance issues." He expects AT&T to go even further, perhaps by integrating tiered data plans that would force iPhone users to pay for the data they download.

Still, perception has hurt AT&T.

AT&T's network is the No. 1 hangup for people who are in the market for an iPhone, according to a CFI Group study. The company's woes have even become the butt of jokes on late-night TV.

"It was reported this week that Google would soon launch its own cell phone as a challenge to the iPhone," said "Saturday Night Live's" Seth Meyers on Dec. 19. "Also a challenge to the iPhone? Making phone calls."

The building frustrations led some angry consumers to take matters into their own hands. "Operation Chokehold," which took place on Dec. 18, was an attempt to overload AT&T's network by running data-intensive apps to try and send a message that consumers "are sick of their substandard network." The ploy failed.

"Unfortunately for AT&T, when it comes to network quality, perception is reality and right now Verizon has a more positive public perception," said Larsen. "If AT&T can continue to show improvement in network throughput, it may blunt some of the impact."

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